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Bank Security Cheque for Loan Dishonoured: What Lenders and Borrowers Need to Know
In the world of banking and loans, security cheques are a common practice. Banks often require borrowers to issue post-dated cheques as collateral for loan repayments. But what happens when such a security cheque for loan amount is dishonoured? This scenario frequently leads to legal battles under Section 138 of the Negotiable Instruments Act, 1881 (NI Act).
If you're a borrower facing a cheque bounce notice or a lender wondering about enforcement options, understanding the legal nuances is crucial. This post breaks down the key principles, drawing from landmark judgments, while noting that outcomes depend on specific facts. This is general information, not legal advice—consult a lawyer for your case.
Understanding Security Cheques in Loan Agreements
A security cheque is typically a blank or post-dated cheque handed over to the lender (like a bank) to secure a loan. It's not meant for immediate encashment but acts as a safeguard. The borrower agrees to repay the loan by a certain date; if they default, the lender can present the cheque.
However, courts have clarified that simply labelling a cheque as 'security' doesn't exempt it from Section 138 NI Act liability. The section penalizes cheque dishonour due to insufficient funds or exceeding arrangement, provided it's issued for discharge of a legally enforceable debt.
Key question: Does a dishonoured security cheque trigger criminal liability?
When Does Liability Arise?
- Debt must exist at presentation: If the loan remains unpaid when the cheque is presented (after the repayment due date), it represents a valid debt. Presentment post-default 'matures' the cheque for enforcement. (Similar principles in multiple cases)
- Presumption under Section 139 NI Act: Courts presume the cheque was issued for a legally enforceable debt unless rebutted. The accused (borrower) must prove otherwise by preponderance of probabilities—not beyond reasonable doubt. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547
Landmark Rulings on Security Cheques and Dishonour
Indian courts have addressed bank security cheque for loan amount dishonoured in several cases. Here's a synthesis:
1. Cheque as Security: Not Always a Defence
In one case, the Supreme Court held: if a cheque is issued for security or for any other purpose the same would not come within the purview of Section 138 of the Act if no debt exists. However, where a probable defence is raised (e.g., cheque given purely as blank security without subsisting debt), acquittal may follow. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547
Yet, in practice:
- If the borrower defaults on the loan, the security cheque becomes enforceable.
- Partial payments must be endorsed on the cheque per Section 56 NI Act. Unendorsed presentation despite payments may weaken the case. Dashrathbhai Trikambhai Patel VS Hitesh Mahendrabhai Patel - 2022 8 Supreme 240
2. Rebutting the Presumption
The defence needs to be probable, drawing from records or circumstances:
- Preponderance of probabilities standard applies. Evidence from complainant can even aid the defence. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547
- Example: Accused proved cheque was blank security for another's liability, not their debt—no conviction. Don Ayengia VS State of Assam and Sri Haren Mudoi - 2014 Supreme(Gau) 306
But failure to rebut leads to conviction. In a stock transaction case, the appellate court accepted the security defence due to account discrepancies, setting aside conviction. High Court erred in reversing without addressing facts. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547
3. Bank's Role and Procedure
Banks must:
- Issue statutory notice within 30 days of dishonour (Proviso (b) to Section 138).
- Allow 15 days for payment post-notice.
- File complaint within 1 month of notice expiry (Section 142).
Jurisdiction lies where the drawee bank (bank on which cheque is drawn) is located—not presentation or notice place. Dashrath Rupsingh Rathod VS State of Maharashtra - 2014 5 Supreme 641
4. Recent Trends: Security Cheques Attract Liability
Modern rulings affirm:
- Further, the borrower would have the option of repaying the loan amount... if the amount... has been discharged within the agreed period, the cheque issued as security cannot thereafter be presented. But post-default presentment is valid. (Repeated in several results)
- Even 'account closed' or 'insufficient funds' triggers Section 138 if debt subsists. SHAJI vs STATE OF KERALA - 2025 Supreme(Online)(Ker) 58894
In a gold loan case, misuse of blank security cheque was alleged, but presumption held unless disproven. SHAJI vs STATE OF KERALA - 2025 Supreme(Online)(Ker) 58894
Borrower Defences: What Works and What Doesn't
Successful defences include:
- No legally enforceable debt: Prove loan repaid or time-barred. (Need documents like receipts.)
- Cheque not for debt discharge: Pure collateral without default—must probablize. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547
- Mismatch in amount/date: Or procedural lapses by bank.
Unsuccessful:
- Mere claim of 'security' without evidence.
- Failure to rebut Section 139 presumption. Courts view it as admission of liability. N. Radhakrishnan S/o Nanoo vs Kerala Agro Industries Corporation Ltd. - 2025 Supreme(Ker) 2066
| Defence Type | Success Rate | Key Requirement |
|--------------|--------------|-----------------|
| Loan repaid (with proof) | High | Receipts/endorsements Dashrathbhai Trikambhai Patel VS Hitesh Mahendrabhai Patel - 2022 8 Supreme 240 |
| Blank cheque misused | Medium | Probable evidence of no debt Don Ayengia VS State of Assam and Sri Haren Mudoi - 2014 Supreme(Gau) 306 |
| 'Just security' claim | Low | Without default proof |
Consequences of Dishonour
- Criminal: Up to 2 years imprisonment or fine (twice cheque amount) or both. Compensatory focus. Thottathil Lakshmanan, S/o. Raman VS Kundathil Sobhana, W/o. Sathyan - 2023 Supreme(Ker) 895
- Civil: Parallel recovery suits possible under Order 37 CPC or DRT for banks.
- Credit impact: CIBIL score hit; affects future loans.
Banks may invoke SARFAESI for secured loans, but cheque bounce adds criminal layer. Anil Kumar Banerjee VS Indiabulls Housing Finance Limited - 2011 Supreme(Cal) 1166
Practical Tips for Borrowers and Lenders
For Borrowers:
- Track repayment deadlines.
- Get repayment acknowledgments.
- Negotiate cheque return post-repayment.
- Respond to notice disputing debt if valid.
For Banks/Lenders:
- Document loan agreements clearly.
- Present cheque only post-default.
- Endorse partial payments.
- Comply with notice timelines.
Key Takeaways
- A bank security cheque for loan amount dishonoured often leads to Section 138 proceedings if debt persists.
- Presumption favours holder (bank); borrower must rebut probabilistically. M. S. Narayana Menon @ Mani VS State Of Kerala - 2006 5 Supreme 547
- Courts balance: Security intent alone insufficient post-default; but probable no-debt defence succeeds.
- Prevention > Cure: Clear agreements, timely repayments.
Legal outcomes vary by facts—e.g., account books, notices, timelines. Recent cases emphasize strict construction but equitable presumptions. Dashrath Rupsingh Rathod VS State of Maharashtra - 2014 5 Supreme 641
Disclaimer: This post summarizes judicial trends from cases like those under NI Act. Laws evolve; specific advice requires professional consultation. Not liable for actions based on this info.
For more on cheque bounce laws, explore related posts or contact a legal expert.
Search Results for "Bank Security Cheque for Loan Dishonoured: Legal Risks"
2006 5 Supreme 547 • India - Supreme Court
S.B.SINHA, P.P.NAOLEKAR
The Appellant clearly said that nothing is due and the cheque was issued by way of security. ... example, if a cheque is issued for security or for any other purpose the same would not come within the purview of Section 138 of ... a higher amount, he would be convicted if it is held that existence of debt in respect of large part of the said amount has not ... The defence of the Appellant had been that the first cheque was a blank cheque given by him....
1999 5 Supreme 60 • India - Supreme Court
S.S.M.QUADRI, D.P.WADHWA, K.T.THOMAS
... Held : There is nothing unusual in Murugan (A-3) providing financial ... Raghunathan (PW-153 said that he would not accept cash and that payment might be made by a bank Demand Draft. ... Accordingly a Demand Draft was obtained from Indian bank. ... security in the seashore.
2017 8 Supreme 710 • India - Supreme Court
ROHINTON FALI NARIMAN, SANJAY KISHAN KAUL
(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any
2014 5 Supreme 641 • India - Supreme Court
VIKRAMAJIT SEN, T.S.THAKUR, C.NAGAPPAN
(4) Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount, ... p align="justify"
2007 0 Supreme(SC) 856 • India - Supreme Court
S.B.SINHA, LOKESHWAR SINGH PANTA
The appellants, born in the USA, faced disputes after demanding repayment of a loan from the college authorities. ... It was stated that one cheque was dishonoured on 18.10.2003 and the father of appellants preferred a Criminal Case No. 7272 of 2003 ... Mahalingam the second respondent on 28.02.2003 allegedly, gave 5 cheques for Rs. 5 lakhs each against the loan amount and two demand ... amount.
2011 0 Supreme(Cal) 1166 • India - Calcutta
PINAKI CHANDRA GHOSE, SHUKLA KABIR SINHA
to take possession of the property for non-payment of dues without intervention of the Court providing a remedy for an appeal to ... of the said Act of 2002. - On 18th June, 1997 the Non-banking Financial Companies which are Housing Financial Institutions have ... It is not in dispute that whether the security was credited prior to the enforcement of the Act or by any notification by which the ... or financial institution#....
2007 0 Supreme(AP) 1201 • India - Andhra Pradesh
C.Y.SOMAYAJULU
of amount covered by dishonoured cheque – Held, Learned counsel relates to murder committed by persons in an unlawful assembly – ... with a demand to pay amount covered by dishonoured cheque within 15 days from date of receipt of that notice – As no acknowledgement ... note for as collateral security for discharging its liability under the aforesaid discounting bill discounting agreement and issued ... and demanding paymen....
2017 0 Supreme(Mad) 153 • India - Madras
N.SATHISH KUMAR
Negotiable Instruments Act - Section 118 – Evidence Act - Suit for recovery of amount – Dishonored of Cheque ... note for said amount agreeing to pay interest at rate of 18% per annum - Held, It is clear that without proving execution of promissory ... , plaintiff has agreed to lend financial assistance. ... The cheque given by the first defendant was dishonoured and in this regard, notice was also issued on 12.08.....
2017 0 Supreme(Mad) 193 • India - Madras
N.SATHISH KUMAR
Issues: The issues included whether the defendants borrowed the amount, executed the promissory note, and were liable to pay ... the claimed amount. ... Loan Recovery - Financial Assistance - Negotiable Instruments Act - [Negotiable Instruments Act, Section 118] - The court held ... Ex.P.4 and Ex.P.5 are the dishonoured memos issued by the bank to show that the above cheque was dishonoured for in....
2016 0 Supreme(Del) 1188 • India - Delhi
VIPIN SANGHI
to repay the amount. ... Decidendi: The promissory note, though not meeting the requirements of a promissory note under the Negotiable Instruments Act, was ... The court decreed the suit for the principal amount along with interest and costs. ... Vinod Sharma as a collateral security. ... 4. ... have been dishonoured upon presentation by the defendant’s bank. ... cheques, which were dish....
2022 8 Supreme 240 • India - Supreme Court
D. Y. CHANDRACHUD, HIMA KOHLI
If the endorsed cheque when presented for encashment of the balance amount is dishonoured, then the drawee can take recourse to the provisions of Section 138. ... Adinarayana, (2003) 8 SCC 300, it was held that the notice did not demand the payment of the cheque amount but the loan amount. It was observed that for the purposes of proviso (b), the amount covered in the dishonoured cheque must be de....
2022 0 Supreme(Kar) 1531 • India - Karnataka
ANIL B. KATTI
The accused has to establish the nexus between alleged taking loan of Rs.50,000/- and the issuance of signed Cheque as a security for the said transaction. Otherwise, accused cannot take the advantage of complainant admitting that he has received the Cheque as a security as referred above. ... The proviso was inserted in the Income Tax Act debarring person from taking or accepting from any other person any loan or deposit otherwise than by account payee cheq....
2026 Supreme(Online)(MP) 1501 • India - IN THE HIGH COURT OF MADHYA PRADESH AT JABALPUR
Further, the borrower would have the option of repaying the loan amount or such financial liability in any other form and in that manner if the amount of loan due and payable has been discharged within the agreed period, the cheque issued as security cannot thereafter be presented. ... If in a transaction, a loan is advanced and the borrower agrees to repay the amount in a specified timeframe and issues a cheque as securi....
2025 Supreme(Online)(Ker) 58894 • India - IN THE HIGH COURT OF KERALA AT ERNAKULAM
M.B. SNEHALATHA, J
It was contended that though he repaid the loan of ₹55,000/-, the complainant refused to release the gold in proportion to the amount repaid. It was contended by the accused that the blank cheque obtained as security at the time of availing the gold loan was misused by the complainant. ... It is a well- settled principle that if a cheque is returned dishonoured by a bank with an endorsement 'account closed' it would amount to dishon....
2025 0 Supreme(Ker) 2066 • India - IN THE HIGH COURT OF KERALA AT ERNAKULAM
M.B. SNEHALATHA
Further, the borrower would have the option of repaying the loan amount or such financial liability in any other form and in that manner if the amount of loan due and payable has been discharged within the agreed period, the cheque issued as security cannot thereafter be presented. ... If in a transaction, a loan is advanced and the borrower agrees to repay the amount in a specified timeframe and issues a cheque as securit....
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